The fossil fuel sector’s business model is fundamentally unstable because of two factors beyond its control: profits linked to volatile commodity prices, and uneven government subsidies that supported its expansion and dominance during friendly administrations.
Many companies were reporting record profits in 2018, when crude oil prices spiked above $75 a barrel. As consumption softened and clean energy boomed, a consensus emerged among analysts that the trend would not reverse: Peak oil consumption was near, and the industry’s permanent decline was already underway. Investments by Wall Street and lenders declined, reflecting the long-term risks posed by investments in carbon-based industries.
This pressure, along with low prices, prompted a wave of hundreds of bankruptcies as hundreds of companies sought relief from the lenders and investors who had financed their aggressive growth plans.
Then, as the industry teetered, it was hit by two more catastrophic risk events: a supply glut caused by deliberate overproduction by Russia and Saudi Arabia, and plummeting demand resulting from pandemic lockdowns. For the first time, oil prices fell into negative territory, further spooking the bankers who finance fossil fuel projects.
The industry was burdened by massive debts taken on during the recent investment boom. As of early 2020, fossil fuel companies were on the hook to repay over $200 billion by 2023, including $40 billion in 2020 alone. As investors backed away, the rating agencies responsible for assessing bond quality started downgrading the companies’ debt, suggesting a higher risk that investors would not be repaid.
Many of these debts were already considered risky. Oil and gas companies were among the biggest issuers of “junk bonds” in the two decades before the pandemic. That means they were too speculative to meet the investment standards of pension funds and other big investors.
As bankruptcies spread, bigger companies swallowed up smaller ones, leading to consolidation that increased the dominance of a few powerful players. Big banks that lend to fossil fuel companies have announced major losses tied to their energy investments.
With the industry pleading for a rescue and the Trump Administration eager to help, the Federal Reserve and Treasury Department, using taxpayer funds provided under the CARES Act, announced relief programs aimed at stopping the bleeding. One tactic was purchasing bonds from investors on the secondary market. This served to reassure investors that if their risky bets soured, the Fed was standing by to rescue them. As an added benefit, it allowed the Fed to claim that it was not bailing out the fossil fuel companies, but merely providing liquidity to the bond market. This implied endorsement enabled fossil fuel companies to issue nearly $100 billion in new debt — a record — in the early months of the pandemic.
Another rescue program involved subsidized loans for mid-sized companies. Although the program originally excluded borrowers with heavy debt loads and those that would use the funds to repay existing debt, the Fed altered the program in response to aggressive lobbying by fossil fuels and allies like Sen. Ted Cruz. As a result, fossil fuels were overrepresented among borrowers participating in the program, receiving $13 for every dollar that went to green energy as of the end of November.
In effect, taxpayers and the Fed provided the exact kinds of financing that private investors had increasingly refused to issue as they became more aware of the risks facing the fossil fuel industry.
Were market forces left to determine the pandemic’s effect on fossil fuels, the industry’s collapse would have picked up speed as demand declined from sectors like transportation and construction. Using the economic crisis to justify bailouts for the companies that produce them, however, the Trump Administration and congressional Republicans managed to prop up the industry, temporarily postponing the inevitable.